Wednesday, December 10, 2008

Remember the Headline

During the summer of 2004, I entered the real estate business to start a new career. I was coming out of school at the time and had no idea what I wanted to do with my life, a feeling I think most people feel these days as they left school.

I decided to go to work for a home building company and sell homes. I spent the morning every day before work reading about my business and reading about my market in general. At the time we were entering the final stage of what ended up being the greatest real estate bubble in the history of our planet.

The headlines, however, talked nothing about a bubble. They talked about the money that people were making purchasing their new homes. People out in California who were buying an averaged price home of $500,000 at the time could expect a 30% return on their home the next year based on the previous year's performances. That meant their home was going to make $150,000. Why would they stay at their jobs? They were homeowners.

It was the only real estate market that I had known so I thought that was the way it would always be. The media felt that way. They said it was due to population growth and the strength of our economy.

I think about what kids coming out of school think when they read the papers today. A major headline in the financial times this morning read, "Interest rates on US treasury bills turn negative." Negative? That seems odd, they must think. Why would someone lend our government money, and pay the government while they hold it?

The media explains it will a familiar clarity. Investors are rushing to "safety." Many kids coming out of school might even think it is a good idea to buy bonds right now. Hopefully, something will not feel right and they might hold off, just as I decided to hold off on purchasing a home in California and quitting my job back in 2004.

The following is a long term chart of the 10 year treasury: (Click on chart)

We are approaching the end of a 25 year bull market for treasuries, and in my view have reached the euphoria stage. (The line dropping straight down at the end means bond yields are falling and their prices are rising)

What a treasury bond represents is the government's promise to pay you US currency in the future. What if you thought our currency would have much less value in the future? Well, the first thing you could do would be to sell your bonds to protect yourself. If you wanted to get aggressive, you could even short treasuries. This would be the equivalent of shorting subprime debt in 2006 if you thought it was overvalued at the time.

We'll see what happens. They said house prices could go up forever, maybe bond prices actually can. If this market begins to crack, you better look out below. A lot of people listening to their financial advisers may lose a lot of money. That money may then be transfered into the hands of those shorting the market, just like with housing.

Sunday, December 7, 2008

The Psychology Of A Bull

I spend a lot of time reading about current market events and different economist's ideas about where we are heading in the future. However, I probably spend just as much time studying the past.

After studying previous market cycles, what I find fascinating is investor's psychology throughout the scope of a bull market. For example, during the 1970's in the previous bull market for commodities gold was almost cut in half in 1976, from $185 to $100. Looking back now it was the buying opportunity of a lifetime, and the bull market continued upward to $850 in 1980.

During the 1980's there was perhaps the greatest stock market crash in history during October of 1987. The stock market crashed 508 points in a single day from 2200 down to 1700. Most investors were panicked beyond belief, and many were shaken out of the market. The investors that studied market cycles were ecstatic. If you knew that you were in a secular bull market for stocks and they were going much higher you cheered for major sell offs. People who bought in the next morning at 1700 were happy they did 13 years later when the DOW was touching over 12,700 in 2000.

That same year marked the end of the 20 year bull market for stocks and the beginning of the current bull market for commodities. We have recently seen a major correction in this commodities bull market that is very similar to the sell off in 1976 and the 1987 stock market crash. Some investors have been shaken off, and some are ecstatic.

When gold, oil, silver, agriculture, copper, and cotton fall in price, I do not get upset. It is wonderful. I love it when prices fall. People I know have recently made purchases in commodities and have watched the prices correct during this current period of deleveraging. They are upset and frustrated they are not moving higher. That makes no sense to me.

I own a ton of silver. Silver has fallen from $19.50 in mid July down to $9 at this writing. I'm not upset about it, I'm very happy. I was happy buying at $19.50. Now? I'm like a kid in a candy store. I'm leveraging my bets, buying mining companies and ETF's that will perform very well if the prices correct back upwards. I hope silver goes to $2, gold goes to $200, and oil goes to $5.

All that will matter when the bull market is over is how many ounces you own, how many oil company shares you own, and how many agriculture, mining, producer shares you own. If you can keep that mindset, then price corrections only allow you to make more money at the end.